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Netwealth Group -Still Racing Higher and Looking Increasingly Overvalued

However, with low switching costs, we expect strong FUMA growth to be offset by industry fee compression, as platform providers largely compete on price. We expect Netwealth to generate a revenue CAGR of 12% over the next decade, and the relatively fixed-cost nature of the business and associated operating leverage should drive margin expansion and a 13% EBIT CAGR over the decade.

Key Considerations

Netwealth is the largest independent investment administration platform in Australia but still only comprises around 3% of the market.

The wealth management sector is experiencing fee compression as a result of technological innovation, and we expect this trend to continue.

Administration platform fees could potentially compress to close to zero, as they have done in the U.S., where platform managers monetise their intellectual property via transactional revenue.

Netwealth provides investment administration software as a service, or SaaS, in Australia via its proprietary software platform, which includes investment portfolio administration, investment management tools, and investment and managed account services. The company charges for its software based on the value of funds under management on its platform, comprising over 95% of group revenue, in addition to providing Netwealth-branded investment products, which are managed by third-party investment managers.

In contrast to the independent platforms, the large vertically integrated wealth managers have narrow economic moat ratings. With the wealth business contributing less than 10% of earnings for most of these companies, their economic moats don’t necessarily reflect their platform businesses or even their wealth management businesses, as these companies are very large and diversified financial services organisations. However, IOOF, which only owns a vertically integrated wealth management business, has a narrow economic moat based on switching costs and intangible assets.

Netwealth may be affected by the requirement that financial advisors act in their clients’ “best interests” if financial advisors feel obliged to move their clients onto the cheapest administration platform. This could create significant downward fee pressure for platforms.

Netwealth operates in a commoditised industry and is much smaller than many of its competitors. We expect the larger administration platforms to continue improving the functionality of their platforms and compete more

aggressively on price.

 (Source: Morningstar)

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General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Dividend Stocks Shares

NIB Holdings Ltd – Grow Earnings Over Time

Approximately 53% of the population is covered by private health insurance because of taxation benefits, shorter wait times, a choice of doctor and hospital, and cover of ancillary health services. NIB demutualised and listed on the Australian Securities Exchange in 2007. It is Australia’s fourth-largest health fund. Attractive long-term industry dynamics are supported by a growing population, government taxation incentives and penalties, and regulated pricing.

  • By spending on customer acquisition NIB can continue to take share, but annual growth in policyholders is expected to be low given affordability issues.
  • NIB can continue to generate attractive returns, using scale benefits and modest switching costs in a highly regulated industry. NIB could also participate in industry consolidation if smaller players become unprofitable.
  • We forecast mid-single digit earnings and dividend growth, with NIB’s 60% to 70% dividend payout ratio lower than peers being a reflection of the firm’s strategy to make small acquisitions to strengthen the private health business and diversify revenue.
  • NIB made two acquisitions to grow its travel insurance offering in recent years, with the rationale to diversify revenue outside of private health insurance, add exposure and scale in an industry expected to experience long-term growth, and leverage its claims management capability and existing distribution channels. We believe NIB will find success in cross-selling, but the business remains dependent on travel activity and being commoditised, is vulnerable to pricing pressure. While leveraging the NIB brand in Australia may come with some success, we do not believe insurers can build a competitive advantage on intangible assets.
  • Industry growth is tied to a steadily increasing population, ageing demographics and the unavoidable rise in healthcare spending. Governments will continue to incentivise participation in private health insurance to share the burden of escalating healthcare costs.
  • Premium growth is generally tied to the increasing cost of healthcare. The government regulator approves/rejects price increases as part of an annual review. Very few have been rejected which helps reduce uncertainty around insurance margins.
  • The symbiotic relationship of private hospital operators, and buyer power over general practitioners, is a key strength of NIB’s business model. Private hospitals are reliant on the private insurance system, as the majority of private hospital income is paid by the insurers.

 (Source: Morningstar)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Dividend Stocks Shares

United Malt Group Ltd – Result as a Public Company Offers Optimism

Nonetheless, the company is the fourth-largest global malt processor and works with some of the world’s largest breweries and distillers as well as fast-growing craft producers. Although management expects United to face higher near-term costs related to its recent public listing, we think this will be offset by longer-term savings. But despite some attractive aspects of the business, we don’t think United has carved an economic moat. It is a commodity processor, with a high degree of fixed costs and limited ability to substantially differentiate its product.

Key Considerations

  • Although we anticipate craft beer consumption–a key driver for malt demand–will rise as a proportion of overall beer in United’s primary markets, the rate of growth is likely to slow, owing to the already high amount of craft brewers globally and flat overall beer volume trends.
  • Long-term client contracts, and the ability to pass through costs in periods of high barley prices help underpin a stable earnings stream and a manageable dividend policy.
  • We expect slowing end-market demand and limited barriers to supply additions driving returns on invested capital about equal to the company’s weighted average cost of capital.
  • Underlying earnings are stable, supported by longterm client contracts and its ability to pass through costs during periods of high barley prices.
  • United Malt benefits from rising craft beer production globally, which requires greater malt volumes and attracts higher prices.
  • Opportunities exist for further penetration into relatively underdeveloped beer markets, such as Asia and Latin America.
  • The commodity products that United Malt provide are readily available from competitors, and the company has little pricing power over the products it buys and sells, making for slim margins.
  • Barley acreage has declined in favour of other adjunct grains like corn or soybean in recent years, which could lead to periods of short supply and higher short-term costs.
  • The loss of key brewing customers, especially if they become self-sufficient for malt, could materially threaten its earnings stream.

 (Source: Morningstar)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Funds Funds

First Eagle US Value A

First Eagle’s multifaceted global value team runs the strategy. Its co-heads, Matt McLennan and Kimball Brooker, each have more than 25 years of investing experience and have cooperated as managers here since March 2010. They also spearhead siblings First Eagle Global SGIIX and First Eagle Overseas SGOIX. Comanager Matt Lamphier directs the research team whose coverage ranges from equities to sovereign bonds and investment-grade credits–all fair game for this portfolio. The manager team added depth in May 2021 with Mark Wright’s promotion to full-fledged comanager after two years of honing his skills as an associate manager.

The team takes a risk-averse approach. With capital preservation in mind, it invests mostly in large-cap equities having what it sees as margins of safety–or prices well below the value of those firms’ average earnings or profitability over a business cycle, their hard assets (such as forest lands), or the strength of their balance sheets. The managers also hold cash (often 10%- 20% of assets) and gold (5%-15%), with gold serving as a hedge against economic calamity.

The Fund’s Approach

This risk-averse approach works well on sibling strategies with broader geographic reach but is less effective for this U.S.-focused offering. It warrants an Average Process rating. Whether investing internationally or in the U.S., First Eagle’s global value team takes an uncommon line. Its managers prioritize capital preservation. While sticking mostly with large-cap equities, they will also hold bonds, gold bullion, and cash. The managers target investments with a margin of safety–that is, a price well below intrinsic value–and assets (real or intangible) that should hold value even during economic distress. The team takes a long-term view, looking at average earnings and profit margins over a business cycle, earnings stability, and balance-sheet health to determine valuations. They often keep annual portfolio turnover under 20%.

Cash and gold stakes are key to this defensive approach. The managers typically keep around 10% of assets in cash–more if opportunities are scarce–and 5%-15% in gold and the equities of gold miners as hedges against economic calamity. The team’s prowess outside the U.S. has served First Eagle’s global and international strategies well, but this U.S.-focused version has struggled to compete. Keeping so much cash and gold on the side-lines has held it back in equity bull markets, and mediocre stock selection over time hasn’t helped.

The Fund’s Portfolio

This portfolio stands out in many ways. With so much cash and gold and so few bonds, equities typically account for 60%-80% of total assets, unlike the equity-only S&P 500 prospectus benchmark and many allocation–70% to 85% equity peers who wade more into bonds. The managers usually own 70-90 stocks. Cash had never been less than 12% of assets at the end of any month in manager Matt McLellan’s 12- year tenure until April 2020; it went on to hit a low of 2% in October 2020 before rising to nearly 10% in March 2021. The portfolio’s gold stake had hovered around 10% going into 2020; it appreciated to more than 15% in July 2020 before dropping back to 10% in early 2021.

The portfolio’s equity exposure is also distinctive. It has tended to be light on consumer cyclicals relative to peers (1.5% of total assets in March compared with the 8.9% category norm) but heavy on energy (7% versus 2%) and basic materials (6% to 3%). The basic-materials stake can be larger if the team is buying the stocks of gold miners such as Newmont NEM and Barrick Gold ABX, but it pared most of those as the price of gold rallied in 2020. Firms with hard assets– such as Weyerhaeuser WY, which owns forest lands, and integrated oil firm Exxon Mobil XOM– also suit this portfolio’s conservative bent.

The Fund’s Performance

This fund’s track record is middling, though a recent category change offers better points of comparison. The portfolio’s gold and cash stakes made it a poor match for its equity-only S&P 500 prospectus benchmark in the decade-long bull market for stocks following the 2007-09 global financial crisis. The strategy’s value tilt didn’t help either, as growth stocks drove much of the rally. A December 2020 Morningstar Category change to allocation–70% to 85% equity from large blend improves the picture somewhat. From manager Matt McLennan’s January 2009 start through April 2021, the fund’s I share class gained 10.6% annualized; that beat the allocation category’s 10.2% average but trailed the S&P 500’s 15.3% and the large-blend category norm of 13.5%. The fund also lagged a custom index approximating the fund’s historical asset exposures (to stocks, cash, gold, and bonds), albeit by a narrower 1.3-percentage-point margin.

Source: Morningstar

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.